Overview of Chapter 13 Bankruptcy

Chapter 13 bankruptcy is sometimes called a reorganization bankruptcy. In a Chapter 13 bankruptcy, you must use your income to pay some or all of what you owe to your creditors over a period of time from three (3) to five (5) years.

Who is Eligible for a Chapter 13?

You must be an individual to file a Chapter 13 Bankruptcy. Businesses cannot file a Chapter 13 bankruptcy under the business name.

Your income must be steady and high enough to be able to pay monthly expenses and also have money left over in order to pay the monthly payments to the court for three (3) to five (5) years.

If your total debt is too high, you are unable to file a Chapter 13. Your secured debts cannot exceed $1,010,650, and your unsecured debts cannot be more than $336,900. A "secured debt" is one that a creditor has a lien on collateral and can take if you don’t pay the debt. An example of such collateral is a house or car. An example of an "unsecured debt" is a credit card or medical bill.

The Chapter 13 Process

Before you can file for bankruptcy, you must receive credit counseling from an agency approved by the United States Trustee's office. These agencies are allowed to charge a fee for their services, but they must provide counseling for free or at reduced rates if you cannot afford to pay. In addition, you must pay the filing fee and file many forms which includes information about your assets, debts, monthly income and expenses.

The most important part of your Chapter 13 paperwork will be the repayment plan. Your repayment plan will describe in detail how much you will pay each of your creditors.

The Automatic Stay

Filing for bankruptcy puts into effect an “automatic stay.” The automatic stay or injunction order, immediately stops most creditors from collecting debts including, garnishing wages, repossession of vehicles, mortgage foreclosure, pending lawsuits/judgments and collection phone calls.

How Much You Will Pay

Your Chapter 13 plan must pay certain debts in full. These debts are called "priority debts," Priority debts include child support, alimony, and certain tax obligations.

In addition, your plan may include your regular payments on secured debts, such as a car loan. A Chapter 13 plan can include arrearages on these secured debts. Arrearages are the amount which you have fallen behind on a mortgage or car note.

In most case, you don’t have to repay the “unsecured debts” in full. The unsecured debts will get paid back a certain rate depending on the amount of debts, your income level, and the amount of equity that you have an interest in property at the time of filing.

How Long Your Plan Will Last

The length of your repayment plan depends on how much you earn and how much you owe. If your average monthly income over the six (6) full months prior to the date you file for bankruptcy is more than the median income for your state and family size, your plan will be for five (5) years. If your income is lower than the state median income, your plan may be for three (3) years.

The Bankruptcy Trustee

The court appoints a “trustee” to oversee your case. The trustee is responsible for distributing the plan payments to the creditors.

The Creditors Meeting

A week or two after you file, you and all the creditors listed in your bankruptcy papers will receive a notice that a "creditors meeting" has been scheduled. The bankruptcy trustee conducts the meeting and, after swearing you in, asks you questions about your bankruptcy and the papers you filed. If the trustee determines that your Chapter 13 Bankruptcy is filed in “good-faith” anf that the filed plan is “favorable”, then the trustee will recommend that the plan be confirmed and the payments will be distributed to the creditors over the next three (3) to five (5) years.

How a Chapter 13 Case Ends

Once you complete your repayment plan, all remaining debts that are eligible for discharge will be wiped out. Before you can receive a discharge, you must show the court that you are current on any domestic support obligations such as child support or alimony, and that you have completed the second part of counseling which is the Debtor Education or budget counseling.